Confidence among builders in the U.S. housing market unexpectedly plunged in September for the second straight month as a spike in mortgage rates continued to weigh on consumer demand for new homes.
The National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, fell five points to 45, the lowest reading since April 2023. The decline followed a six-point drop in August.
Any reading below 50 is considered negative.
"High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," said Robert Dietz, chief economist at NAHB.
Sentiment among builders had been steadily rising earlier this year as limited resale inventory pushed would-be buyers to seek out new construction instead. But when mortgage rates shot above 7% in September, it throttled demand among would-be homebuyers.
Rates are expected to remain elevated, as the Federal Reserve has hinted that it may hold interest rates at peak levels for longer than previously anticipated.
Rates on the popular 30-year fixed mortgage are currently hovering around 7.18%, according to Freddie Mac, well above the 6.02% rate recorded one year ago and the pre-pandemic average of 3.9%. It is near the highest level in two decades.
"The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power," said NAHB Chair Alicia Huey, a custom home builder and developer from Birmingham, Alabama. "And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, which is further adding to housing affordability woes."
Higher rates are also prompting more builders to use sales incentives in order to woo buyers: About 59% of builders indicated they are using all types of incentives, including buying down interest rates.
Sentiment fell across the board in all four regions in the U.S.